Lower offer for rival likely

Tuesday

Dec 30, 2008 at 12:01 AMDec 30, 2008 at 12:26 PM

NEW YORK -- The collapse of a joint venture with a state-owned Kuwaiti company might make Dow Chemical less willing to pay the $15.3 billion price for Rohm and Haas that it initially agreed to last summer as energy prices peaked.

NEW YORK -- The collapse of a joint venture with a state-owned Kuwaiti company might make Dow Chemical less willing to pay the $15.3 billion price for Rohm and Haas that it initially agreed to last summer as energy prices peaked.

Kuwait's government backed out of the deal with Dow late Sunday, calling the K-Dow Petrochemicals joint venture "very risky" because of the global financial crisis and crude prices that have tumbled more than 70 percent since July.

Dow, based in Midland, Mich., had expected more than $7 billion in pretax proceeds from the K-Dow deal.

Dow would not comment yesterday on the failure of the joint venture or negotiations with Rohm and Haas.

Shares of both U.S. companies tumbled more than 16 percent after the collapse of the $17.4 billion venture with Kuwait's Petrochemical Industries Co.

It was the second major buyout in the chemical sector to go bust this year as the economy unraveled.

Dow agreed to pay a 74 percent premium for Philadelphia-based Rohm and Haas in July as it and other chemical-makers faced unprecedented costs for energy and carbon-based feedstocks.

Since then, crude has fallen to levels last seen in 2004, and credit markets that fueled a buyout frenzy have frozen.

Rohm and Haas said it "continues to work diligently" to complete the acquisition, which it said was not affected by the K-Dow venture.

Some analysts think it would be unrealistic to expect the original price to hold, however, and wondered whether Dow would be willing to take on more debt in the current economy.

Dow Chemical Co. said this month that it will cut 5,000 jobs, or about 11 percent of its work force. It also said that it will close 20 plants and idle 180 more.

Dow initially agreed to pay $78 per share, a huge premium over Rohm and Haas' $44.83 closing price on July 9.

Dow said at the time that buying Rohm and Haas would allow it to cut costs and provide a cushion from the volatile chemicals market.

Dow's balance sheet now could be leveraged by $29.6 billion, analysts said, if the Rohm and Haas deal is not reworked. That could jeopardize Dow's investment-grade rating, said John Rogers, an analyst with Moody's Investors Service. "Dow clearly doesn't want to back itself into a corner," Rogers said.

If Dow is obliged to accept the deal on the original terms, that could threaten shareholder dividends, said Banc of America Securities analyst Kevin McCarthy in a note to investors.

Dow has issued a quarterly dividend for nearly a century.

It's more likely that the deal will be renegotiated for less than $70 per share, Deutsche Bank analyst David Begleiter said in a note to investors.

Dow has said it plans to establish an advanced-materials business unit at Rohm and Haas' headquarters in Philadelphia and contribute some Dow businesses to Rohm and Haas' existing portfolio. The total revenue of that new unit is expected to approach $13 billion.

If Dow must accept the deal on the original terms, its dividend might be at risk.